Risk to reward ratio: meaning in forex and gold trading
The risk to reward ratio compares the distance to the stop loss with the distance to the take profit, such as 1:2.
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Risk to reward ratio: The risk to reward ratio compares the distance to the stop loss with the distance to the take profit, such as 1:2.
How to calculate it
Risk to reward (R:R) = distance to stop ÷ distance to target. A 25 pip stop with a 50 pip target is 1:2. Traders often describe results in R, where 1R is the amount risked: a full win at 1:2 is +2R and a full loss is −1R.
R:R and win rate together
R:R on its own says little. The breakeven win rate is 1 ÷ (1 + reward/risk). At 1:1 you need to win more than 50% of trades; at 1:2, more than 33.3%; at 1:3, more than 25%. A high ratio with a very low hit rate can still lose money, which is why expectancy is the better measure.
Worked example
Buy EUR/USD at 1.1200, stop 1.1175 (25 pips), target 1.1250 (50 pips). R:R is 1:2. If 40% of such trades hit target and 60% hit the stop, expectancy is 0.4 × 2 − 0.6 × 1 = +0.2R per trade before costs.
Common mistakes
- Stretching targets to show a better ratio that price rarely reaches.
- Ignoring costs, which matter more on small targets.
If you follow trade signals, for example the gold signals or EUR/USD signals, understanding this term helps you size and manage each trade yourself. The free Forexuro Telegram channel shares daily market updates where these ideas are used in practice.
Related terms
Tools and guides
Frequently asked questions
Is 1:3 always better than 1:1?
Not necessarily. A wider target is reached less often. What matters is the win rate at that ratio.
What is R in trading?
One unit of risk: the amount you lose if the stop is hit.
Education only, not financial advice. Trading forex, gold and CFDs carries a high risk of losing money, and leverage magnifies both gains and losses. Past performance is not a reliable guide to future results. Read our risk disclosure.